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Filing US Taxes from Canada

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an american filing their US federal taxes in Canad

Filing US Taxes from Canada

An estimated 700,000 Americans call Canada home. Making Canada one of the top destinations for Americans living abroad. If you are an American living in Canada you can be called an American Expat living in Canada. And as an American expat living in Canada, do you know the things that you should know about filing your US expat and Canadian taxes?

If you still don’t know by now, the US is one of the very few countries in the world that has its taxation system based on citizenship instead of residency. So if you are a US citizen or a green card holder, you are required to file your US federal income tax return and pay the taxes due to the IRS. Regardless of your physical location and residence. There is some sliver of good news though, the IRS placed several provisions that you can claim as an American expat to mitigate double taxation.

 

 

What American expats need to know about filing US taxes

what you need to know about filing US federal taxes from CanadaA certified financial planner and financial management adviser with Investors Group in London, Ontario, notes that “generally, as a U.S. citizen living and working in Canada, you are taxed for money earned in Canada.”

The US requires all Americans and green card holders to file taxes on their worldwide income above $12,550 for single or married filing separate, or if they earned more than $400 through self-employment. That’s one thing to keep in mind about filing US taxes from Canada.

While filing taxes from Canada, expats must convert their Canadian income into US dollars. They may use any reputable currency conversion resource they wish, so long as they use the same one consistently.

You must file Form 8938 if you have financial assets worth over $200,000 per person registered in a foreign country including Canada.

Having a total of $10,000 in foreign financial accounts at any time during the tax year means that you must also file FinCEN form 114. More commonly known as FBAR which stands for Foreign Bank Account Report.

There are two methods available to Americans living in Canada to reduce or eliminate their US tax liability: The Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC).

The Foreign Earned Income Exclusion allows you to exclude from US income tax the first US$110,000 of your worldwide income if you can demonstrate that you are resident in Canada. So if you have $100,000 worth of rent payments from your apartment building and $10,000 worth of interest payments from your savings account, then your entire $110,000 worth of income will be excluded from US tax. Meanwhile, the Foreign Tax Credit allows you to reduce or eliminate any Canadian taxes paid by dollar-for-dollar credit against your US tax bill. This means that if you pay $10,000 in Canadian taxes during a year and owe $10,000 in US federal taxes, the latter will be offset against the former.

The Foreign Tax Credit can be beneficial for those who pay more income tax in Canada than in the US, as you can carry the excess US tax credits forward for future use.

But don’t celebrate just yet! Both the FTC and FEIE provisions from the IRS must be claimed by filing the necessary forms. If your worldwide income exceeds the minimum IRS thresholds, you are still required to file your US Federal Income Tax Return.

 

US – Canada Tax Treaty

US Canada Tax TreatySince the taxes in the US are based on citizenship and not on residency, one can’t help but think of the possibility of double taxation. Luckily, the relationship between the US and Canada goes way back. This enabled them to create an amicable tax treaty between the two countries. The US-Canada tax treaty helps both its citizens and residents to avoid double taxation when it comes to income tax and capital gains tax. However, a Savings Clause is in place that limits its benefits for American Expats in Canada.

The primary solution for American expats to mitigate the risk of double taxation is to claim US tax credits of the same value that they have paid to the CRA or the Canada Revenue Agency.

If an American expat in Canada has income originating in the US, the American expat can claim Canadian tax credits against the income tax paid in the US to the IRS. For an American expat to claim US tax credits against paid taxes in Canada, you must file Form 1115 when you submit your US federal income tax return. If you do this, you may be able to minimize your overall taxes.

Much to dissatisfaction of American taxpayers, the US-Canada tax treat actually has a clause that allows the Canadian government to provide the US with the Canadian tax information of American expats. This information is given to the IRS, which may include their Canadian investment and bank account balances. The treaty also allows the Canadian government to demand and collect fines and penalties on behalf of the IRS when an American expat fails to file their US federal income tax returns.

U.S. citizens who move to Canada should know that many investment instruments available in Canada are subject to U.S. tax, including Registered Retirement Savings Plans, Tax Free Savings Accounts, and Canadian-based mutual funds.

Furthermore, the IRS doesn’t fully exempt capital gains on the sale of a primary residence. As such, US expats in Canada should always consult with a US Enrolled Agent to ensure that they understand the implications of buying or selling their home or Canadian investments.

 

What American expats need to know about Canadian taxes

If you are just about to make your move to Canada, you should know that their tax day is on April 30. This is also the date that you have to file your taxes, unless you are self-employed, then you get to file on June 15. The CRA or the Canada Revenue Agency is the Canadian equivalent of the IRS, and the personal income tax return form is called T1 General or simply T1.

Income tax rates in Canada range from 15% to 33%. American expats in Canada are commonly considered Canadian residents for tax purposes if they happen to maintain an abode in Canada. However, several factors may be taken into consideration, like having a bank account, club memberships, business relations, and location of dependents and spouses.

If you think that you still have plenty of things to know about your tax situation as an American expat living in Canada, you should get in touch with an Enrolled Agent to help you navigate both your US federal income tax return as well as your Canadian income tax returns.

Lucky for you our Enrolled Agent is ready to help you navigate your US federal income tax obligations! Just send us a message today and we’ll get in touch with you today!

Get in touch with us!

 

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IRS Falls short on their FATCA Reciprocal Plans

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IRS Falls short on their FATCA Reciprocal Plans

If you’re reading this, chances are you’re an American. And congratulations: that means you’ve worked within a citizenship-based taxation system your whole life. That’s right! US Citizens and Green Card Holders are required by law to report and disclose their worldwide income to the IRS by filing their federal tax returns yearly.

In the past, this has resulted in American expats being caught up in tax evasion cases. But the impact of this has only been truly experienced by Americans living in the past few decades. In 2010, the Foreign Account Tax Compliance was introduced to battle tax evasion and instigate voluntary tax compliance with the US tax laws. With the introduction of FATCA, financial institutions based abroad and investment firms are obligated to report the account balances and contact information of their American account holders straight to the IRS.

How does the IRS enforce this if the foreign financial institution is miles away? Simple. Whenever foreign financial institutions don’t comply, the US will impose withholdings when the foreign financial institutions decide to trade in US financial markets. However, some foreign financial institutions think that FATCA reporting is too much work with not enough upside for them that they sometimes decline, freeze, or close accounts that are under US citizens, citing that it’s too much of a liability.

 

give and take - IRS reciprocal reporting FATCA IRSFATCA reciprocal reporting – A two-way street

FATCA was always intended as a “you scratch my back, I’ll scratch yours” deal. Foreign governments would give the US financial information on their citizens and corporations, and in return, the US would do the same for them.

But it didn’t turn out that way. Foreign countries have been providing the US with this information since 2014, but the US never held up its end of the bargain.

In a recent interview, the IRS Commissioner said that while he believes in “transparency where transparency is appropriate,” he admitted priorities were a difficult decision to make.

He explained further by saying, “We are forced to make difficult decisions regarding priorities, the types of enforcement actions we employ, and the service we offer.” Scarce resources and friction that’s coming from the American Banking community make reciprocal reporting to be a far-fetched dream, especially when the American Banking community already fought against the proposal of a homeland version of FATCA.

America’s inability to give back what they are getting may create unintended consequences in the near future. Other countries worry that hidden wealth may be placed in the US without their home countries’ tax authority even knowing.

About 100 countries (the US not included) have banded together to create their own solution in solving this problem. They’ve introduced the Common Reporting Standards (CRS), which is similar to FATCA to fend off tax evasion and to protect the integrity of their taxation systems by sharing vital taxpayers’ information across borders.

 

The IRS trying their best

In 2020, $573 million dollars have been spent by the IRS when it comes to FATCA enforcement. Before FATCA was introduced in 2010, the IRS had no way of knowing if US citizens and Green card holders have income generated abroad.

The latest TIGTA report hints that the visibility of American citizens’ foreign accounts is still low. The IRS Commissioner confirmed this in a committee hearing when he was saying:

“Congress enacted FATCA in 2010, but we have yet to receive any significant funding appropriation for its implementation. This situation is compounded by the fact that when we do detect potential non-compliance or fraudulent behavior through manually generated FATCA reports, we seldom have sufficient funding to pursue the information and ensure proper compliance.”

When FATCA was being conceptualized by Congress, thinking that it could generate about $8.7 billion in untapped revenue over the next 10 years. However, the IRS is a few billion short of the expected collection. For the last 12 years, the IRS was only able to collect less than $14 million.

 

You've got time to still be compliantStill got time to be compliant

Did you feel that? That’s the pressure to make a change.

The IRS has already agreed to work on some of the key recommendations from TIGTA:

  1. “Establishing follow-up procedures and initiating action on error notices with the FFIs
  2. Continuing efforts to systemically match Form 8966 and Form 8938 to identify non-filers and underreporting related to U.S. holders of foreign accounts and to the FFIs
  3. Informing taxpayers how to obtain global intermediary identification numbers
  4. Strengthening overall compliance efforts directed toward improving the accuracy of reporting by Form 1042-S filers.”

Since the IRS still working on making FATCA more robust, American expats still have some time to keep up with their taxes that are past due!

Don’t have an idea on how you can catch up with your past-due filing? Send us a message today and our Enrolled Agent will help you in no time!

Get in touch with us!

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Top 3 IRS Audit Triggers for Small Business

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an irs auditor auditing a small business

audit triger written on a piece of paper

Top 3 IRS Audit Triggers for Small Business

Small businesses are the backbone of the American economy. The US Small Business Administration reports that in 2019, small businesses created 1.8 million net new jobs as they employ approximately 47.3% of Americans.

A small business can be affected by the Internal Revenue Service (IRS) audits just as much as large businesses. While you may think that the IRS will never audit your small business, rest assured that this does happen whether you like it or not. The IRS has a list of what they call “audit triggers”—red flags that increase your chances of being audited. While the audit rates for small businesses are quite low, you do want to avoid putting yourself in the position of having to defend your numbers. The best way to prepare for an IRS audit is to realize what the IRS audit triggers are.

Here’s a rundown of the top 3 IRS audit triggers for small business:

 

Mixing Personal Expense Deductions as Business Expense Deductions

It’s tempting to think that because you’re talking business while you’re eating, your meal with your spouse should be a business expense. But this doesn’t mean that it’s a qualified expense.

The IRS will also look for documentation supporting the purpose of the meal and the people in attendance. If you cannot provide this documentation, then you’ll have trouble justifying the deduction.

In general, it’s best to avoid commingling personal and business expenses as much as possible. While it won’t necessarily disqualify an otherwise valid business deduction, it often makes it more difficult to prove that the expense was actually incurred for business purposes.

 

Noncompliance with Employment Taxes

Employment taxes are a part of doing business that many small business owners find themselves unprepared for. It can be difficult to keep up with compliance regulations not only because they’re constantly changing, but because they’re so complex.

To get started, you should know that as an employer, you’re responsible for paying your share of FICA and Medicare taxes on your employees’ wages, in addition to withholding the employee’s portion of these taxes. These taxes are calculated as a percentage of the wage amount.

To prepare for this expense, it’s important to know that part of it will come out of your profits – not from the wages paid to employees – so it may be wise to dedicate some time each month or quarter to calculate the tax liability for all your employees and put aside enough money to cover. This ensures that you are paying the right amount of employment taxes so you can avoid this IRS audit trigger.

 

Never showing profits

If you consistently show a loss year over year, you may find yourself in the IRS’s crosshairs.

It can be common for new businesses to lose money in the first few years of their existence, as they are getting off the ground and establishing themselves in their market. If your business is consistently losing money, it can be an indication that you could be using your business as a cover or shelter for income or assets that are not being reported, or that your business is not really a business at all. The IRS will want to conduct an audit to make sure this isn’t the case.

If your business is legitimate, but still continues to operate at a loss, it may indicate to the IRS that you are not trying to make money with your business—that what you have is a hobby rather than in business to make a profit.

 

The best way to avoid an IRS audit?

For small businesses, the best way to avoid these IRS audit triggers is to have a well-experienced bookkeeper with knowledge of tax law to help your business to achieve and maintain your business tax compliance.  Bookkeepers can ensure that your transactions are properly classified and that all applicable tax deductions are acquired. An added bonus would be is if your bookkeeper is also an Enrolled Agent that is certified by the IRS to prepare and file taxes for personal and business federal income tax!

Don’t want your business to trigger these IRS audits? Get in touch with us and let our Bookkeepers and our Enrolled Agent prepare your books and taxes at the same time!

Send us a message today!

 

Introduction to Tax Planning: The Basics

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a person planning his taxes

tax planning written on top of an alarm clockIntroduction to Tax Planning: The Basics

Tax planning means examining your financial situation with the goal of reducing tax liability. A tax plan works to ensure that each financial element of a plan works together to reduce your total tax bill as much as possible. Through tax planning, you can make contributions to retirement plans and investments that have the best impact on reducing your tax bill each year. Since retirement plans and investments can have a large effect on taxes owed, it’s important to consider these elements when you’re creating a tax plan. Tax planning also includes thinking about how businesses should arrange their income and expenses each year to create a lower total tax bill for the business overall.

 

Primary objectives of Tax Planning

Tax planning means taking all appropriate steps to reduce your tax liability while reducing the impact of taxes on your overall financial picture. It’s about ensuring that you follow the letter of the law, as well as its spirit. It’s about being proactive–about ensuring that when it’s time to pay your taxes, you’ve taken every available precaution to minimize your outlay and maximize your return. Tax planning applies to both individuals and businesses. In fact, tax planning is essential for any business owner or investor who wants to remain profitable and free from legal entanglements.

 

Importance of Tax Planning

In today’s financial climate of ultra-low bank interests and economic uncertainty, tax planning is a necessity for anyone who wants to see real returns on their investment. Tax planning is not justtax forms needed for tax planning about minimizing your tax burden. It’s also about maximizing your returns by taking inflation into account, as well as taxes, expenses, and so on.

For example, the property market has been showing strong signs of recovery over the last few years. However, this isn’t necessarily good news for all investors. There are currently a lot of government grants available for first-time homebuyers that can mean big savings on stamp duty and other associated costs. But keep in mind that these high capital gains taxes will eat up any profits you make in the long run. That’s why it’s important to get professional investment advice when looking at properties to purchase. Professional advisers can help you identify any additional costs or risks you might not have considered if left to your own devices—and they can help you figure out ways to take advantage of current grants and tax credits while still keeping your tax bill as low as possible.

 

Lower Tax Bills

Paying low taxes puts less strain on individuals and companies; working toward tax efficiency is the best way to hold assets and capital together. People living abroad may find assets that were tax-efficient in their home country taxable in their country of residence. Reviewing tax plans can reduce the tax bills, resulting in more improved financial stability.

 

Tax Payment Flexibility

Proper tax planning gives individuals and businesses more flexibility when paying taxes. This flexibility means payments can be made at the most appropriate times for personal and business finances. As a result, people are less likely to pay more taxes than necessary, giving them control over their finances. This makes it easier to budget effectively, which in turn leads to greater financial sustainability.

 

Tax Planning Advantages

  • Get a head start

Businesses operating under a trust can take advantage of tax planning to estimate distribution early enough in the year, saving the need to make decisions out of rush. Tax planning allows businesses to look at the available options and strategize according to the analyzed data.

  • Minimized Litigation

Avoiding or evading taxes is an action taken by people who find the tax rates too high. Tax planning helps taxpayers and the government resolve their differences by paying taxes properly, as the government seeks to collect taxes while the taxpayers look for ways to pay less. Thus, tax planning can save citizens and entities from legal troubles.

  • Seeing the Bigger Picture

Tax planning helps individuals and businesses map out their financial future. Business owners discover ways to change the business structure to increase profits. As a result, a business owner finds new investments and looks for untapped sources of revenue.

  • Economic Growth

Taxes pay for the projects that help our country grow and thrive, including development projects. A solid tax planning strategy is essential for any business, as well as personal finances. Some of the benefits of good tax planning include creating more money for your savings account, increasing your business’s stability, and avoiding bankruptcy because you can’t cover your bills and loan payments. The health of a country’s economy benefits both citizens and the entire country.

 

Tax Planning Types

  • Purposive Tax Planning

In this type of tax planning, you use intelligent strategies to take advantage of tax provisions to achieve a certain financial goal, such as changing your investment strategy or diversifying your business activities.

  • Permissive Tax Planning

Permissive tax planning involves taking advantage of various exemptions and deductions while following all the rules that apply to you.

  • Short-Range Tax Planning

Temporary tactics are implemented in this type of tax planning strategy. These temporary tactics are implemented at the end of the year to achieve certain specific tax objectives.

  • Long-Range Tax Planning

Polar to short-range tax planning, this type of strategy forms long-term tactics at the start of the year and the results of the formulated strategies are expected only in the long run.

 

Disadvantages of Tax Planning

Tax planning can be of great help in reducing your tax liability and increasing your savings. However, there are some downsides to tax planning that you should consider before investing your hard-earned money in tax-saving products.

Usually, tax planning results in the blocking of funds to purchase a particular investment product. This can impact short-term liquidity and flexibility. This can especially be a concern for senior citizens who need a certain amount of cash for daily needs and medical expenses.

At times, taxpayers tend to confuse tax planning with tax evasion and end up misinterpreting certain provisions. This may lead to an increase in their income tax liability or even attract penalties or interest charges.

 

Bottom line

Tax planning can help you reduce the overall tax burden. However, it is important to know that you should stay within the limits of the tax laws while planning your taxes. This means you should not engage in any activity that helps you cut down your tax liability without paying heed to the fact that there are certain rules in place for tax planning.

One of the most popular ways to plan your taxes is by investing in different instruments. For example, there are several investment options available today such as stocks, mutual funds, bonds etc., where you can invest your money and earn returns on them. However, before investing in any of these instruments, you need to understand how they work and whether they can actually help you save taxes or not.

If you need expert help in planning your taxes, send us an email today and we’ll have our expert Enrolled Agent get in touch with you!

 

 

You still have time to make an IRA Contribution for 2021!

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IRA Contribution Form

You still have time to make an IRA Contribution for 2021!

Are you behind in your 2021 IRA Contributions? Don’t worry, you still have time to make an IRA contribution for 2021. If you haven’t contributed funds to an Individual Retirement Account (IRA) for the tax year 2021, or if you’ve put in less than the maximum allowed, you still have time to do so. You can contribute to either a traditional or Roth IRA until the April 18, 2022, due date (April 19 if you live in Maine or Massachusetts), not including extensions.

The good news is that you can make your 2021 IRA contribution at any point while the tax year is active. But before you do, we have a friendly reminder: make sure that you tell the trustee who holds your IRA account that the contribution is for 2021. This helps them report it correctly, and it ensures that the funds are added to your account in a timely manner.

You can contribute up to $6,000 of your earnings for tax year 2021 (up to $7,000 if you are age 50 or older) to an IRA, either a traditional IRA or a Roth IRA (if you qualify). You can choose to fund both, but your total contributions cannot be more than these amounts.

 

Traditional IRA

You may be able to take a tax deduction for the contributions to a traditional IRA, depending on your income and whether you or your spouse, if filing jointly, are covered by an employer’s pension plan.

This means that even if you don’t meet some of the qualifications for deducting an IRA contribution from your taxes, you still may be able to do so. For instance, if you have a high income and are covered by a pension plan at work, you may be able to deduct your contribution up to the amount of your total compensation.

The IRS website has more information on how to qualify for a tax-deductible IRA contribution.

 

Roth IRA

You cannot deduct Roth IRA contributions, but the earnings on a Roth IRA may be tax-free if you meet the conditions for a qualified distribution.

Roth IRAs are funded with after-tax dollars, so you cannot deduct your contributions from your taxes.

If you take out your money before age 59 1/2 (or before age 55 if you have changed jobs), you will have to pay taxes and penalties on that money unless you qualify for an exception (for example, if you are disabled or use the money to buy a first home).

A qualified distribution happens when:

  1. You take out your money after age 59 1/2
  2. You take out your money because of death or disability
  3. You take out your money to buy a first home for up to $10,000

Each year, the IRS announces the cost of living adjustments and limitations for retirement savings plans

To ensure you’re saving as much as possible, check out the newest updates each year.

 

Bottomline

You’ve probably heard it before, but saving for retirement should be an important part of anyone’s financial planning. It’s important to review your retirement goals each year and make sure you’re maximizing your savings.

Need help navigating your tax compliance this year? Hurry and send us a message today while you still have time to file your taxes!

Get in touch with us!

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Can I write off my crypto losses?

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trader losing a lot of crypto

Can I write off my crypto losses?

can i write off my crypto tax losses?

The swings in the value of cryptocurrency over time have made it hard for traders to figure out at what point they should sell and incur a taxable event. Even if you lost money on your crypto investments this year, the IRS allows you to use those losses to reduce your crypto tax liability or even get a refund. And if you’re looking to be more active in the crypto space next year and turn those losses into gains, there are still some options available to you.

If you’re an unsavvy investor and are sitting on a heavy loss in crypto, don’t worry. The IRS allows investors to claim deductions on cryptocurrency losses that can lessen your tax liabilities or even result in a tax refund. There are also investment strategies you can use throughout the year to maximize your losses and get the most out of your crypto investments. Now, the question is… Can I write off my crypto losses?

 

 

Is reporting crypto losses necessary?

Yes, you need to report your cryptocurrency losses to the IRS, which is required to ensure honest reporting and proper tax liability. The IRS classifies cryptocurrency as a capital asset; every taxable event, including your crypto losses, must be reported on Form 8949. Here are some samples of common taxable crypto events:

  • Selling crypto in exchange for cash
  • Trading one cryptocurrency for another cryptocurrency
  • Using crypto to purchase goods and services

There are other taxable events when it comes to crypto taxes, if you want to know more about these taxable events, you can read this blog to delve deeper into what’s a crypto taxable event.

 

The information you need to do your crypto tax forms

If you have crypto transactions on your tax forms, make sure that you include the following information:

  • The name of the crypto you bought.
  • The date you bought, sold or traded the crypto.
  • The amount you bought it for and the amount you sold it for. Commonly known as the cost basis.
  • The income or loss you incurred from the sale, trade, or purchase of cryptocurrency.

You can write off your crypto losses, but you’ll need to transfer the totals over to Form 1040 Schedule D, where you report your total capital gains and losses for the tax year.

For a detailed guide on filing crypto taxes this year, this article can help you out!

 

Offset Capital Gains Crypto to write off crypto tax loss

Crypto Capital Gains FormThere’s a saying that goes ‘ a loss is a gain you didn’t realize you had’. Losses on crypto can be used to offset your capital gains. You can write off your crypto losses against your capital gains, so you pay less federal income tax when you file your taxes this year. However, your capital gains tax still depends on how long you’ve held your crypto asset.

If the crypto has been held for more than a year, you can use long-term capital losses to offset long-term capital gains. If it was held for a year or less, you can use short-term capital losses to offset short-term capital gains. Remember that you’re only allowed to offset losses of the same type.

When you have both long-term and short-term gains on an asset, it’s more beneficial to first harvest your short-term capital losses (which are taxed at your regular tax bracket) to offset your short-term gains.

Don’t have crypto gains? Don’t worry, you might be able to claim a deduction.

If you have no capital gains to offset, you can deduct up to $3,000 in capital losses from your ordinary income each year according to 26 U.S. Code § 1211 of the Internal Revenue Code.

If you lost more than $3,000 in a taxable year, you can carry those losses forward over future tax years to offset any capital gains or use the losses as an itemized deduction.

 

Claiming a Crypto Capital Loss Deduction of up to $3,000 from ordinary income

26 U.S. Code § 1211 provides a deduction for taxpayers who sustain losses on capital assets. Instead of tax-loss harvesting, you can deduct $3,000 in capital losses each year, or $1,500 if you’re married and filing taxes separately. Claiming your cryptocurrency losses can result in a higher tax refund through this deduction. If you’ve lost more than $3,000 in net capital losses in a tax year, the excess amount can be carried forward into future tax years, where they may offset capital gains. You may claim the losses again in a future tax year, or use them to offset income before paying taxes.

 

Crypto Tax Loss Harvesting

You can offset your capital gains throughout the year by selling investments at a loss. This helps you avoid unrealized losses – losses on investments held for more than one year but not long enough to receive long-term capital gains benefits. Tax-loss harvesting entails the sale of crypto or other digital assets when fair market value drops below cost basis. This will generate capital losses. You can continue to net those losses against capital gains and reduce your tax bill as described above.

 

‘Wash Sale’ Rule Exception in writing off crypto losses

in December of 2021, the ‘wash sale’ rule is only applicable to stocks and securities. It no longer applies to cryptocurrency in general. A wash sale occurs when a taxpayer sells a stock or security at a loss, but buys either the same one or a substantially identical one within 30 days of the sale. Even though the IRS does not allow a deduction for stock and security losses, this taxpayer is still able to deduct ordinary and necessary investment expenses that would otherwise be disallowed due to claiming the Wash Sale Loss.

However, the wash sale rule does not apply to crypto. As a result, tax-loss harvesting is more effective for crypto investments.

 

What happens if you don’t pay taxes on crypto?

By reporting your taxable crypto transactions on Form 8949, you can help reduce the chance of an audit by the IRS.

The IRS doesn’t disclose its audit selection criteria, but it presumably relies on information provided on a tax return, such as the answer to the virtual currency question on Form 1040 or the information on Form 8949.

The IRS uses a computer system to check the Form 1099 information against what a taxpayer reports on their tax return. A taxpayer that answers No to the question about virtual currency transactions on Form 8949, or doesn’t complete Form 8949 and doesn’t include it with their return, is more likely to be audited; the IRS now has information that may result in penalties on top of whatever additional tax may be owed. It is always a good idea to make accurate tax returns.

The IRS has begun sending taxpayers CP2000 notices when information on a Form 1099 does not match what a taxpayer reported on his/her tax return. Cryptocurrency tax software allows taxpayers to complete and file their taxes using existing blockchain technology. However, some software providers do not provide information on how their software calculates gains and losses. This audit trail can be difficult to construct without a trusted provider.

 

Conclusion

Don’t be discouraged by crypto losses: they happen to everyone. Instead, strategize how you can turn your losses into future profits. As the saying goes, ‘a loss is a gain you didn’t realize you had’. There are plenty of opportunities for you to make a bad thing become a good thing. You just have to be creative about it!

Need an expert to help you with your crypto taxes this year? Our expert Enrolled Agent is here to help you with the highly complicated field of crypto tax filing and planning!

Get in touch with us today! Hurry, the tax season is about to end!

Want to know more about Crypto Taxes?

Check out our other Crypto Blogs to help you with your Crypto Tax Compliance!

 

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Why Are Social Security Benefits Taxable?

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why are my social security benefits taxable

Why Are Social Security Benefits Taxable?

Retirement and disability benefits administered by the Social Security Administration (SSA) are taxable. You pay federal income taxes on your benefits only if you have other substantial income in addition to your benefits. Your income and filing status affect whether you must pay taxes on your Social Security benefits. About 40 percent of Social Security beneficiaries pay federal income taxes.

The Social Security Administration will send you a Form SSA-1099, Social Security Benefit Statement, each year to show the amount of benefits you received. Include this statement with your federal income tax return to find out if you must pay taxes on your benefits.

You can determine whether any of your benefits are taxable by adding one-half of the Social Security money (collected during the year) to your other income. Other income includes pensions, wages, self-employment, interest, dividends, capital gains, and any other taxable income that must be reported on your tax return. On the 1040 tax return, your combined income is the sum of adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

 

Filing an Individual Federal Tax Return

  • If your combined income (adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits) is between $25,000 and $34,000 for the year, you may be required to pay income tax on up to 50 percent of your benefits.
  • If it is more than $34,000, up to 85 percent of your benefits may be taxable.

Filing a Joint Federal Tax Return

  • If you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income taxes on up to 50 percent of the amount of any Social Security benefits that you receive.
  • Up to 85% of your benefits may be taxable if your combined income is more than $44,000.

Filing Separately as a Married Taxpayer

Up to 85% of social security benefits may be taxable if you are:

  • A married taxpayer who lived apart from your spouse for all of 2021 with more than $34,000 income
  • A married taxpayer who lived with your spouse at any time during 2021

Work Pension

If you receive a pension based on work for which you paid Social Security taxes, your pension will not reduce your Social Security benefit. If you are retired or disabled and receive a pension from employment not covered by Social Security, your Social Security benefits may be reduced.

Retiring abroad?

Generally, in other countries, you’re not taxed on income that you receive as retirement pay from the United States. As a U.S. citizen who is retiring abroad and receiving Social Security, for example, you may owe U.S. taxes on your income but may not be liable for tax in the country where you’re spending your retirement years.

Tax laws treat benefits from the Social Security program differently from most other forms of income. For some individuals, Social Security benefits may not be taxable, and you may not need to file a federal income tax return. However, if you receive income from other sources and are a citizen or resident alien of the United States, or are a citizen of another country but are covered under the U.S. social security system because you worked in the United States, then you may have to pay U.S. taxes on some of your benefits – the same as if you were still living in the U.S.

You may also be required to report income earned in the country where you retired and pay taxes on that income. Each country is different, so consult a local tax professional specializing in expatriate tax services.

Help is just an email away

If you receive Social Security and you’re not sure if it is taxable, an Enrolled Agent can help you determine if some or all of your benefits are taxable!

Get in touch with us today!

 

Bookkeeping and tax services Katy TX

How to choose the best tax preparer near you – Here’s what you should look for!

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how to choose the best tax preparer in my area

How to choose the best tax preparer near you – Here’s what you should look for!

Do you feel like taxes are getting harder and harder every year? Do you find yourself asking how will you find the best tax preparer in my area? Well, you’re not alone! Taxes are getting harder and harder as the years go by, if tax preparation is too much to handle yourself this year and think that you need some help with tax preparation this year, check out this checklist to find the right person for the job.

When you hire a tax preparer, it helps to ask what credentials and certifications they have.

It might come as a surprise to you, but tax preparers have access to your most personal details, including your bank accounts, marriage, and kids — and your Social Security number.

Taxpayers should ask prospective tax preparers some key questions before hiring them. Here are 5 things that to consider that can help you choose the best tax preparer near you.

 

  1. Find a tax preparer with an Enrolled Agent designation

The Enrolled Agent designation is one credential that stands out when it comes to the field of tax preparation! Enrolled Agents are certified by the Federal Government through the IRS to prepare taxes for everyone. Enrolled Agents also go through the IRS’ Annual Filing Program to ensure that they are up to date with the latest rules and guidelines concerning your taxes. The Accredited Business Accountant/Advisor and Accredited Tax Preparer programs prepare people to fulfill annual filing season requirements. These credentials require varying amounts of study, exams, and ongoing education.

 

  1. Watch out for Tax Preparer Red Flags

Because there are many people claiming to be tax preparers, it can be difficult to know who’s right for you. Here are a few red flags that could mean someone isn’t legitimate.

    • Promises the moon when it comes to your tax refund

      When looking for a tax preparer you can fall for the “it’s-too-good-to-be-true” trap. The trap involves promises of high tax returns that are significantly higher than what you usually get for the past few years. Unless your income, family situation, or the tax law has changed significantly, your tax refund should be similar from year to year. Be wary of anyone who says they can get you a refund far in excess of anything you’ve received in the past.

    • Won’t sign the return

      The law requires those who prepare taxes to sign the tax return that they have prepared! If you find yourself with a tax preparer that outright refuses to sign a return, do not put your signature on the paper. Find another tax preparer that will willingly sign the tax return that he or she has made and then you can have the peace of mind of placing your signature on the return since your tax preparer placed theirs on the return.

    • Doesn’t have a website

      You should choose an independent tax preparer who has a permanent business presence and is easy to find. You’ll want to be able to find him or her if you’re audited or have any questions about your return.

    • Charges you based on your refund

      Legitimate tax preparers charge their clients either an hourly fee or a flat rate for their work. Avoid those who charge based on the size of your refund; this practice is considered unethical by the National Association of Tax Professionals.

    • Listen to your gut

      When deciding on a preparer, go with your gut and trust your instincts. If something about a tax preparer doesn’t feel right—they seem to gloss over or misunderstand your questions or tax situation, for instance—it might be best to keep looking for someone else to handle your return.

 

  1. Interview Tax Preparers in your area

You can learn a lot by researching the tax preparer online, but nothing beats a personal discussion. This is particularly true when you’re looking for a long-term tax preparer that you can trust. Tax season is busy, so don’t expect a deep conversation. But make sure to ask your tax preparer for a five to ten-minute phone call at least. During the call, get the following information if it is not readily available on the preparer’s or professional’s website:

  • How they handle and store your sensitive financial documents.
  • Are the charges based on a flat fee or an hourly rate?
  • How many years have they been in the business?
  • Do they prepare the returns themselves or have a staff to assist.
  • Do they file tax returns electronically?
  • Are they an Enrolled Agent.

 

  1. Runaway from Tax Preparers who still file by paper

Tax preparers who file 10 or more taxes per year are required to file electronically. If your tax preparer refuses to file electronically, this might mean that they don’t do that much tax preparation to have the knowledge and skills to properly file your taxes.

 

Bottom line

Anyone can pose themselves as a tax preparer by simply having a PTIN. However, preparing taxes is complicated work that requires years of experience and technical tax knowledge to properly execute. Getting stuck with a tax preparer that doesn’t have the experience or technical tax knowledge of an Enrolled Agent might result in mistakes in your tax returns and it could lead you to hot waters. Take these tips in mind when you are looking for a tax preparer so you can save yourself the hassle of an IRS audit!

Rushing to meet the 2022 tax deadline and need a trustworthy tax preparer to help you out? Don’t worry we’ve got you covered!

Get in touch with us today! We are located at 24044 Cinco Village Center Blvd 100, Katy, TX. You can call us at +713 855 8035

Let's get you started on choosing the best tax preparer in my area!

Most Common Tax Mistakes to avoid in 2022

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Most Common Tax Mistakes to avoid in 2022

Thousands of taxpayers receive their tax refunds late not because of the IRS’ own doing but because of the tax return filing errors made by taxpayers when they prepare their tax returns themselves. As the April 18 tax deadline approaches, taxpayers should avoid these common tax return filing errors on their returns to ensure they get their refunds accordingly and without delay. Here are the most common tax mistakes to avoid 2022 if you want to get your refund without delay:

 

  • Filing by paper.

most common tax mistake -filing by paper

Even though filing your tax returns the old traditional way is not a mistake itself, electronic tax return filing is the fastest and easiest way to file taxes. It takes a fair amount of time for accountants to find the right form to fill out, complete the form, and then attach all necessary documents before submitting the return. Electronic filing saves you time by filling out all of these forms for you. It also cuts down on mistakes because when you use tax software it automatically applies the latest tax laws, checks for available credits or deductions, does the tax calculations for you and asks you for all required information. As a taxpayer, you should know that filing paper returns will take longer than usual this year because the IRS is working through a backlog of those forms related to COVID-19. Electronic filing is encouraged by the IRS.


  • Not Reporting ALL Taxable Income.

most common tax mistake - Not Reporting ALL Taxable Income

 

Not declaring or reporting all of your taxable income is one of the most common tax mistakes this year. Make sure you have the documents needed to complete your federal and state tax returns before you begin. Examples of documents needed are Forms W-2, 1099-MISC, or 1099-NEC. If you underreport your income, you may be subject to penalties and interest. Wages, dividends, bank interest, and other income received that was reported on an information return should be entered carefully on your tax forms. This includes any information needed to calculate credits and deductions.

 

  • Incorrect or Misspelled Names and Social Security Numbers.

most common tax mistakes - Incorrect Filing state Misspelled Names, Social Security Numbers, incorrect bank accounts and routing numbersThe IRS wants you to list Social Security numbers exactly as printed on the card. If you claim someone as a dependent, you must enter his or her Social Security number. If the dependent or spouse doesn’t have an SSN, enter the Individual Tax Identification Number (ITIN). The same principle applies to names listed on a tax return; they should match the name on the Social Security card.

  • Incorrect Filing Status.

The Interactive Tax Assistant on IRS.gov can help you choose the correct filing status, especially if more than one filing status applies to your situation. Filing software, including IRS Free File, also helps prevent mistakes with filing status.

  • Incorrect Bank Accounts and Routing Numbers.

If you file a federal tax return, you can have your refund directly deposited into one, two, or even three accounts. Make sure that the financial institution routing and account numbers entered on the return are accurate. Incorrect numbers can cause a refund to be delayed or deposited into the wrong account.

 

  • Not Answering the Virtual Currency Question.

most common tax mistake - Not Answering the Virtual Currency Question

This is probably the most common tax mistake to avoid in 2022, not reading through the form can cause you to skip this new question in Form 1040 which asks whether, at any time during that year, a person received, sold, sent, exchanged, or otherwise disposed of any financial interest in any virtual currency. All taxpayers must answer this question – not only those who engaged in a transaction involving virtual currency.

 

 

 

 

  • Guessing Applicable Tax Credits and Deductions.

most common tax mistake - Guessing Applicable Tax Credits and Deductions

Taxpayers who make mistakes figuring credits or deductions can use the Interactive Tax Assistant Tool on IRS.gov to ensure they are getting all of the benefits to which they are entitled. Tax software will alert taxpayers if any required forms or schedules are missing from the return. Taxpayers should double-check where items appear on the final return before clicking Submit.

 

 

 

 

  • Not Signing and Forgetting to Date the Tax Return.

most common tax mistake - Not Signing and Forgetting to Date the Tax Return

 

 

This primarily might be the most common tax mistake in 2022. When you file a joint return, make sure that your spouse must sign and date it, as well. E-filers can use a self-selected personal identification number (PIN) to sign the return.

 

 

  • Not Keeping a Copy of Your Tax Return.

most common tax mistake - not keeping a copy of your tax returnsIf you’re planning to file your return electronically, be sure to make a copy of your signed return and all schedules for your records.

  • Ignoring Tax Filing Extensions.

If you can’t meet the April 18 deadline this year, you can request an automatic filing extension to October 17, 2022. Remember that while an extension grants additional time to file, tax payments are still due April 18, 2022.

 

 

 

Bottom line

When preparing your taxes DIY Style, it is not uncommon to make mistakes. The realm of taxes is vast and complicated and even the most well-intentioned taxpayer that DIYs their tax preparation and filing can make mistakes. However, in the eyes of the IRS, mistakes are mistakes and this can trigger an audit that can cause a much larger headache for you. Don’t gamble with your tax return filing. Find the best tax preparer near you so you can have peace of mind that your taxes are prepared correctly!

Get in touch with us today

 

How does Crypto Tax Work for Retail Investors

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expalnation of how crypto tax works

How does Crypto Tax Work for Retail Investors

Cryptocurrency has risen to prominence in recent years. The total market capitalization for digital currency, which includes Bitcoin, the first widely-used cryptocurrency, has risen from $10 billion in July 2016 to over $1.1 trillion earlier this year. This unprecedented rise in fame of crypto triggered an influx of new crypto traders hoping to catch a ride to the moon.

If you’re one of those traders that choose to hold crypto instead of cashing out on those unbelievable crypto gains then you probably know by now what happens if you choose to exchange or convert your crypto into an actual currency used to buy everyday needs…

You’ll feel a tax pinch! Cryptocurrency is a growing trend in finance. To answer the question of how much you’ll owe Uncle Sam, you need to understand how does crypto tax works and how crypto tax affects retail investors.

 

How does cryptocurrency get taxed?

Any country with a functional government has the right to tax whatever they deem taxable. In the case here in the US, how crypto gets taxed all boils down to the Internal Revenue Service. Many experts believe that cryptocurrency’s lack of regulation is subject to less oversight than fiat currencies, like the dollar or euro. Many crypto investors also believe that by using an asset that is not regulated by any government, they are able to avoid paying taxes on their investments.

However, this is not the case. The IRS requires crypto exchanges to report user activity on gains and losses and cryptocurrency is taxed in much the same way as traditional investments.

According to the IRS, for federal income tax purposes, crypto is considered as property. This means that the IRS or the federal government sees your crypto as a capital asset. Since crypto is being seen as a capital asset, your crypto will get taxed the same way as when you might owe taxes when you realize a gain or loss on the sale or exchange or a capital asset.

For example, when you sell a capital asset, whether it’s a stock, bond, exchange-traded fund, house, Bitcoin, or any other investment—you determine whether you have a capital loss or a capital gain by comparing the sales proceeds to your original cost basis. If the proceeds exceed your original cost basis, you realize a capital gain. When reversed, you’ve locked in a capital loss.

 

Calculating Crypto Tax Rate

Just as you do when you sell a stock, if you sell crypto assets, you need to pay taxes on any capital gains. But there’s a difference between the time frames for short-term and long-term capital gains with crypto versus stocks. And that difference could mean more crypto taxes due after your transactions.

  1. Short-Term Crypto Capital Gains and Losses. If you buy and sell an asset within a 365-day period, you will have either a short-term capital gain or loss. If you sold the asset for more than what you paid for it, you have a short-term capital gain. If you sold the asset for less than what you paid for it, you have a short-term capital loss. Short-term gains are subject to the same tax rates that apply to ordinary income such as wages, salaries, commissions, and other earned income. For example, in 2021 the lowest tax bracket is 10% and the highest is 37%.
  2. Long-Term Crypto Capital Gains and Losses. If you sell an asset after holding it for more than one year, the difference between your sales proceeds and your cost basis is a long-term capital gain or loss. For long-term gains, you pay a lower tax rate than you do on short-term gains. Capital gains rates are currently 0%, 15%, and 20%. The rate you pay depends on your income.

 

When is crypto taxable?

Let’s see what you need to know to figure out if you have tax obligations relating to your crypto assets. If you buy crypto with fiat currency, then you owe tax on any gains when you sell it for fiat currency. If, on the other hand, you used crypto to buy something or pay someone directly, then there is no taxable event.

Nontaxable crypto events:

  1. Buying and holding crypto are not taxable. Simply buying and owning crypto isn’t taxable on its own. You owe crypto taxes to Uncle Sam once you sell it, selling the crypto means that you’ve ‘realized’ your gain. The length of your hold determines if your crypto will be taxed based on short-term or long-term capital gains tax.
  2. Crypto donation to a tax-exempt charity or non-profit isn’t taxable. Directly donating crypto to a 501(c)(3) charitable organization is not taxable, you may even be able to claim a charitable deduction. A nice incentive when you put your crypto gains in good use.
  3. Gifting and receiving crypto is not taxable. If someone decided to give you free crypto, you’re unlikely to trigger a taxable event. However, once you sell or participate in a taxable crypto activity like staking then you are likely to trigger crypto taxes. Gifting crypto to someone else on the other hand falls under the gift tax rules. There are certain thresholds that you must be wary of when you’re gifting crypto to someone you know.

Taxable crypto events that fall under capital gains:

  1. Selling crypto is taxable. Selling your crypto for cash is a taxable event. If you sold it for a higher price than you have paid for it then that qualifies as a capital gain. On the other hand, selling your crypto for cash at a lower price than you’ve paid for it means that you might be able to deduct losses on your crypto tax report.
  1. Exchanging one crypto to another is taxable. When you use Ethereum to buy Bitcoin or if you sell Solana to buy Cosmos, you technically have to sell your Ethereum before you buy a new asset. Since this is considered as a crypto sale, the IRS sees this as a taxable event.
  2. Spending crypto is a taxable event. Using Ethereum to grab yourself a pizza means that you’ll likely owe taxes on the transaction. In the eyes of the IRS, spending crypto is no different from selling it. Spending crypto means that you need to sell the asset before you can exchange it for common goods and services, and selling crypto means that it is subject to capital gains tax.

Crypto Income is taxable:

  1. Salary paid in crypto is taxable. In 2021, pro football player Russell Okung was among the first to be paid in cryptocurrency. If you get your wages in crypto, you will pay crypto tax according to your income tax bracket.
  2. Crypto in exchange for your goods or service is taxable. You are responsible for reporting crypto income to the IRS if you accept crypto as a mode of payment for your business or service.
  3. Mining and Staking crypto are taxable. Earning passive crypto income through mining is taxable. You’ll most likely owe taxes based on your earnings according to the fair market value of the crypto you mined on the time you received the crypto. Cryptos mined as a business is taxed as self-employment income. Meanwhile, rewards from staking crypto are treated like mining income. The taxes you’ll owe will be based on the fair market value of the staking rewards the day you receive them.
  4. Crypto hard forks are taxable. Your taxes on crypto you got from a hard fork will depend on a number of factors, including when the asset is available to withdraw from your exchange.
  5. Crypto airdrops are taxable. Receiving crypto airdrops from a crypto company as a part of their marketing campaign is a taxable event. You are required to report the crypto airdrop income you received to the IRS.

 

Crypto Income Tax Calculator

As a taxpayer, you’re probably already used to seeing your federal and state income tax deducted from your payroll stubs. Receiving income in the form of crypto e.g., mining, staking, and rewards, are also subject to the same income taxes your regular paycheck gets. Warning: if you earned a lot of crypto income from your crypto activities, your tax bracket might get affected. This will probably result in you paying higher taxes. Talk with our crypto tax professional to get the latest guidance.

 

Crypto Tax Professional

A lot of people still don’t understand how crypto tax works and only a few know about cryptocurrency taxable events, Finding the nearest crypto tax professional near you is your best bet to properly reporting taxes on your crypto gains or losses. Not reporting your crypto gains or losses to the IRS can result in hefty fines and penalties. Even honest mistakes are considered punishable by the IRS.

Need to file your crypto taxes ASAP? Get in touch with us today!

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